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Tuesday, August 9, 2011

One kaklase P-Noy should listen to

What is worrisome about the Philippines, Dr. John Nye told an audience of businessmen last Thursday, is how we are falling behind our Asean neighbors in terms of economic growth. We grew five percent in the last decade but our neighbors grew seven to eight percent. This is unnatural, the Filipino-Americaneconomics professor observed.

Dr. Nye is no ordinary economist. He was valedictorian of P-Noy’s Ateneo High School class. He has a bachelor’s degree in physics from CalTech and a masters and doctorate degree in economics from Northwestern University.

A professor of Political Economy at George Mason University and a national fellow at the Hoover Institution at Stanford University, he is a specialist in European economic history and institutional economics.

His lecture last week under the sponsorship of Asia United Bank was on “Speeding up Philippine Economic Growth: a Historical and Institutional Perspective.” His lecture was well received and the question on everyone’s mind was, “has he talked to P-Noy?” He wouldn’t say anything about it, neither confirming nor denying any contact. But I understand he did meet the President and the next question is, did P-Noy get anything out of the meeting?

I want to believe P-Noy did imbibe some good ideas. For one thing, Dr. Nye isn’t like most economists we have met… he takes a stand and ordinary mortals can actually understand him. That’s because he doesn’t scare people off with esoteric econometric models and formulas but talks about the real world – the impact of elites, special interests and institutions on a country’s economy. He also thinks there is too much focus on higher taxes, fiscal balance and infrastructure spending when structural imbalances in the economy are the more urgent impediments to growth.

In talking about our situation, Dr. Nye said it is good to take a long-term view and not be too impatient. He believes in incremental progress so long as the steps we take are in the right direction. We may not feel it today, he said, but if we have consistent growth over time, we will just wake up one day and see people are actually better off. We must, however, get things right. Our economic history, he observed, is one of constant missed opportunities.

We don’t have to be a stellar economy, he said, we only need to be ahead of our neighbors. He then illustrated his point with a little anecdote about some campers and a bear.

A couple of campers were out in the woods when both caught sight of a bear. One of the guys took his running shoes out of his knapsack and started putting it on.

“What are you doing,” the other camper asked.“Run as fast as I can, of course,” was the reply.“You’re silly,” the other camper said. “You can’t outrun the bear!”“I know that,” the first guy said. “I was only intending to outrun you.”

That’s the point: we probably cannot outrun economies like China but we should be able to outrun Vietnam, Indonesia and horrors, Myanmar, Cambodia and Laos… And his advice on how we can do that is to get rid of our nationalist insecurities and open up our markets to global competition.

Dr. Nye said he doesn’t understand why we have so many laws that bar the entry of foreign investment that would create jobs here in the country. We are so afraid of having foreigners exploit our labor at home but we don’t seem to mind letting foreigners exploit them abroad, he observed. Thinking global is the way to create jobs for these workers at home, he stressed.

Modern development involves a switch from low productivity to high productivity areas. China, he said, is the latest example. Its impressive story is all about moving workers in great numbers from the low wage/low productivity rural/agricultural sector to higher productivity industrial (export)/service sectors. We, on the other hand, have policies like high minimum wages and strict employment protection in the industrial sector that prevents industry from absorbing more workers and thus spark the economy’s transformation. That is also why the unemployment rate for college graduates is higher than those with less education.

We were once the leading economy in our region, he lamented, but we squandered our early advantages through protection (import substitution), manipulated currency, anti foreign rules.

Extreme nationalism, he said, turned the nation inwards in the 50s and 60s. Like Argentina, we basically raised the cost of capital and destroyed investment. We also slowed the growth of English in the 70s when the whole world was anxiously trying to learn it.

The key for us, according to P-Noy’s kaklase, is structural transformation which also means we have to get rid of first order distortions. He identified these as: high industrial minimum wage + regulation; restriction on foreign ownership of land and businesses; multiple barriers to competition, complex and intrusive tax system and our version of agrarian reform.

Dr. Nye thinks our land reform is ineffective and inefficient, worse than the old system. It preserves the dominant groups and kills new competition without redistribution. The rules benefit existing elites.

On how we run our economy over all, Dr. Nye denounced what he sees as a marriage between nationalist and populist thinking with the interests of the elite in preserving restrictions to global competition. It is only global competition that can break the stranglehold of the traditional oligarchs on the economy, he stressed. This is specially so because we have weak institutions and arbitrary enforcement of rules.

Our problem, he said, is that we Filipinos love making new laws too much. Right policies rather than more rules should do better for us. He cited the telecoms deregulation policy of FVR as one outstanding example of how opening up an industry delivered better service and contributed to economic growth. Here, the state’s role is merely to provide a level playing field.

An example of failed policy that saw massive state intervention is what has happened to the power sector and because of it, we are still suffering the region’s highest electricity rates. He does seem to have a point there because we are about to fall into that same trap of state intervention mandating massive subsidy to renewable energy through so-called feed-in tariffs that will allow vested groups to rent-seek at the expense of consumers who must bear the burden of even higher power rates.

How do we get going? Dr. Nye was realistic enough to acknowledge that the path to reform is difficult because entrenched interests will fight to keep their privileges. Even communist China, he observed, had its entrenched interests in its major cities of Beijing and Shanghai. That is why the economic revolution started in far away Guangdong and Fujian, he pointed out. And when the reforms in these second tier provinces started bringing prosperity there, it was easier to introduce similar reforms in Beijing and Shanghai.

He suggested that we open up the market in small regions, establish mini Hong Kongs or mini Singapores. I thought that was what we were trying to do with Subic but somewhere along the line, the entrenched interests prevailed and Subic is nowhere near the dream being peddled at its inception as a special free port. Its free port status (followed by countless others) just became a legal excuse to smuggle highly dutiable merchandise, another form of rent seeking by established politicians.

He also thinks we should be cosmopolitan… find ways to involve international players not beholden to local interests. We should encourage regional competition and increase market access so that different businesses are involved. Then, don’t be fixated on legal details.

Finally, he called on us to always look outwards. Filipinos, he said, are not afraid of the world, so why not let more of the world in? By allowing more globalization, you will keep Filipinos working at home and not have to send them abroad. And he said, he is making these points from the perspective he has of world economic history… of how winners and losers are made of economies through time.

I sure hope he spends more time talking to P-Noy. I am afraid it is difficult to absorb everything he has said in the course of one briefing. Dr Nye is one kaklase P-Noy should really spend more time with.

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FEF is a public advocacy organization dedicated to advancing the cause of economic and political liberty, good governance, secure and well-defined property rights, and market oriented reforms. It counts among its members former and present Cabinet secretaries and undersecretaries, leading figures in the academe, respected media personalities and opinion makers, and prominent members in the business and finance community.